Is China Planning to Restrict or Eliminate Export of 'Heavy' Rare Earth Metals?

The Chinese economy is a "command" economy, not a free market economy. This means that the state sets, among other things, manufacturing goals and resource allocations. The Chinese central government decides what is important to the economy and makes certain that money and credit flow to those sectors of the economy it has chosen. At the beginning of each five-year economic planning cycle the central government adopts a "five-year plan" to be followed rigorously. Individual and business success in China means meeting the goals of the five year plan as it applies to your sector of the economy.

Thus it is, and can be, no surprise at all to any informed observer of the Chinese economy that various, official, industry-specific planning commissions are now submitting their ideas to the China State Council in Beijing, which will review those ideas and adopt or modify them for political as well as economic reasons and then discard or include them, as the China State Council wishes, in the official listing of goals of the next Five-Year Plan for the period 2010-15.

It is amazing to me that anyone could believe that a "draft" plan for a segment of the economy is a final plan and that in addition it would be released, unofficially, to a foreigner with a vested financial interest in construing and misrepresenting a draft as a final plan. Nonetheless, this is what ill-informed or compromised reporters for Mineweb apparently believe.

Anyone who is following the news about the market fundamentals of the rare earths in order to judge their potential as investments should read the article on Mineweb.com with extreme skepticism both for what it reports and for what is gets very wrong about the Chinese rare earth mining industry.

First of all, the article purports to point to a "draft" report supposed to be an internal document from a Chinese study group commissioned for and addressed to the China State Council. The Mineweb article says

the Chinese draft report, entitled Rare Earths Industry development Plan 2009‐2015, has been submitted to the China State Council for review and implementation in 2010, and outlines plans to restrict Chinese administration of rare earth quotas, totally banning the export of some rare earths and consolidating a large number of Chinese rare earth facilities.

We are supposed to believe that the China State Council is just waiting around for the rare earth industry to tell it what to do, so it can "implement" those recommendations. We are also supposed to believe that the words

…outlines plans to restrict Chinese administration of rare earth quotas, totally banning the export of some rare earths and consolidating a large number of Chinese rare earth facilities

are intended to have meaning in the English language. The author or editor probably means to say that Chinese rare earth quotas are to continue to decline, as they have been doing for several years, but that some exports of specific rare earths will be immediately banned. Further, the author or editor may be trying to say that the central Chinese government is pressuring the rare earth industry to consolidate to become more efficient and less polluting-as we have read elsewhere recently more coherently. I can’t help asking if any of you who believe that the rare earth industry is telling the Chinese State Council what to do might want to also buy a bridge connecting Manhattan to Brooklyn?

The Mineweb article further on lets us know that it is the “heavy rare earths” the export of which is to be immediately banned.

In all fairness terminological inexactitude seems to be prevalent among most of those writing about the rare earths, so let's first clear up what I mean when I speak of the "heavy" rare earths:

The rare earth metals are "chemically" very similar, and this makes them difficult to separate from one another other than by labor intensive repetitive processes which take advantage of and operate on small chemical differences (e.g., solubility in a particular solvent, or ability to bind differentially to a chemical species in specific situations of concentration and pH). Rare earth elements are "typically" separated from one another by long slow solvent extractions repeated hundreds and even thousands of times.

Nature even over geological time has had the same problems with separating the rare earths elements from one another as homo sapiens has had. Nature, however, did not succeed except in one way. The minerals that make up the geology of the rare earths generally separate themselves into two broad types: the lower atomic numbered rare earths (lanthanum (57)) through neodymium predominate are called ores of the "light" rare earth elements, known as LREEs, and the other group which are enriched-at least when compared to the ores of the LREEs-in the higher atomic numbered rare earth elements are known as HREEs.

There is actually just one single solitary deposit of REEs today being worked and processed to recover the HREEs commercially. These are the so-called ionic clays of Szechuan, China, in which nature performed some ancient ion exchange chemistry for us.

Why does any of this matter?

It is because two of the HREEs have unique properties that greatly influence the properties of permanent magnets made with the LREEs.

The HREE's dysprosium and terbium, when added to the neodymium-iron-boron permanent magnet alloys that are today essential components of the electric motors and generators used in cleantech and military applications, raise the temperature at which the magnetic strength of the permanent magnets diminishes or vanishes (The temperature at which a permanent magnet loses its magnetism is called the "curie" point after its discoverer-the brilliant physicist whose fame was eclipsed historically by his much more famous wife, Madame Curie).

It is extremely important that an electric motor or electric generator be able to operate at as high a temperature as possible in places such as under the hood of a car or in an aircraft or ship. It is also important that transport dependent on electric motors or generators be able to run in the desert.

The People's Republic of China today is the world's sole producer of the HREEs.

For the last five years China has been systematically reducing its export allocation of all of the rare earths. Just at the end of last June (2009) the Chinese government announced that the rare earth allocation for 2009 would be around 32,000 metric tons; For 2008 the total export allocation had been around 38,000 tons. Just for comparison it should be well noted that Japan’s projected total usage of rare earths for 2008, before the economic slowdown, was 40,000 metric tons.

Those who view China’s continuous reduction of its export allocation of rare earth metals over the last five years as an economic ploy to maintain the prices of the rare earths do not understand that the rate of growth of China’s domestic demand for rare earths has exceeded the rate of growth of China’s domestic production for every year of the twenty-first century. Thus it is certain that China’s domestic demand for rare earth metals will exceed its domestic production in the near future. This, in fact, is the main driver for China’s reduced allocation of exports of rare earths. The most optimistic of projections of Chinese production and demand now show that Chinese domestic demand will extinguish its ability to produce before 2014, at the latest.

Therefore unless there is substantial non Chinese production of rare earths in the very near future there will be shortages of rare earths for production outside of China followed by an end to such exports.

The critical period will have begun when and if China suspends exports of the HREEs, dysprosium and terbium. These two HREEs are first and foremost indispensable and irreplaceable in military applications where performance, not cost, is the key. The militaries of the world’s great powers today know only too well that increased weight and decreased performance are the wrong way to go with smart weapons, aircraft, satellites, and spacecraft.

Designers of wind turbines, full hybrid, plug-in hybrid, and battery powered cars know that performance is dependent on temperature range for peak efficiency, and that for all permanent magnet using DC motors and generators substituting ferrite magnets for rare earth magnets adds weight and decreases performance and that without HREEs rare earth permanent magnets are temperature limited.

The USA, Australia, Canada, Greenland, South Africa, and India have a variety of rare earth deposits and projects in various stages of development all the way from exploration to one in actual, limited, production (Molycorp’s Mountain Pass, California, mine is being readied to resume mining, the company says, after a so-far seven year hiatus. Mountain Pass is now producing 2 mt/day of neodymium/praseodymium oxide and 4 mt/day of lanthanum oxide from concentrates above ground mined and beneficiated prior to 2002).

The free market has not been kind to the rare earth mining industry. Australia’s world class REE deposits, Lynas Corp (OTCPK:LYSCF), and Arafura Resources [ARU:SYD], have been on the edge of LREE concentrates production for several years but have had a steady stream of financing problems that have resulted today in Chinese financing being in place oron the table for both while political battles hold up both from going forward. Even if either or both were to go forward there is today no refinery outside of China prepared to process the ores from either-to be fair the Lynas business plan includes such a refinery to be built in Malaysia, but that is held up for financing today also.

In the USA MolyCorp seems also held up by financing issues, but I think that MolyCorp can be brought into full production (again) within a reasonable time. However if MolyCorp is to be the bulwark of the USA against a cutoff of rare earths, in general, from China then it, MolyCorp needs to resume mining as soon as possible and to continue to expand and extend its solvent extraction plant on site.

The USA also has a substantial alternate rare earth deposit site, as insurance against being cut off from Chinese material, centered in the Lemhi Pass district of Idaho and Montana, which is showing good grades of rare earths. The properties are owned and being developed by Thorium Energy, Inc., a privately held venture

Canada has two rare earth deposits under development. One is in Saskatchewan at Hoidas Lake and is being developed by Great Western Minerals Group, [GWG:TSXV], which also has several other rare earth deposits in the USA, Canada, and the Republic of South Africa. The other Canadian rare earth project is in the Northwest Territories at Thor Lake and is owned by Avalon Rare Metals [AVL:TSX)] [AVARF: OTCGX] . Thor Lake is well under way in its pre-feasibility study, and I urge you to look at the detailed data on Avalon’s web site.

No deposits outside of China other than Lynas, Arafura, Mountain Pass, Hoidas lake, or Thor Lake can be developed in time to stave off a supply interruption crisis.

But no matter which of the above deposits outside of China is developed it will have to include the parallel development of Avalon’s Thor Lake if the rare earth end user industry outside of China is to remain independent and even continue.

Thor Lake’s very large deposit of rare earth ores is unique in that it has a great deal of fergusonite, which is unusually rich in the HREEs. No other accessible economically mineable deposit of REEs in the world outside of China’s ionic clays has anywhere near the potential of supplying the HREEs necessary for the production of high performance rare earth magnets capable of operating at high temperatures.

The only solution to the high probability of the west being cut off from China’s REEs in the first half of the next decade is the development of Molycorp’s Mountain Pass mine, or Lynas’ Mt. Weld, or Arafura’s Nolan’s Bore, or Thorium Energy’s Lemhi Pass, or one of Great Western’s North American deposits AND Avalon’s Thor Lake deposit. Then and only then will there be a complete supply of REEs available from sources outside of China.

Chinese, now joined by Japanese, economic nationalism is moving to close off several of the above avenues by taking control of one of the major LREE deposits named above. Japan’s Toyota (NYSE:TM) has even agreed to finance the development of a potentially very large and high grade rare earth deposit in Vietnam, but that is many years off. Chinese mining companies are aggressively moving into Australia and have already bought a substantial portion of Arafura and have offered to buy control of Lynas. These Chinese investments are not however to develop REEs for the world market but to insure the continued dynamic growth of the Chinese domestic end-using REE based industry, so in fact such investments by China will only reduce the number of candidates for the supply of the LREEs outside of China. Industry in the west won't fare much better if the Japanese gain control of any portion of the non-Chinese supply of REEs. In either case the interruption of supply to North America and Europe of the REEs will mean a decrease in high tech and clean tech manufacturing jobs and a further erosion of technological leadership.

The pros and cons of economic nationalism are not up for debate any longer in Asia or even Europe. If Americans wish to continue to have the capability to produce wealth in the twenty-first century age of technology that is upon us we need to improve our supply of and our control over the critical resources of rare metals that are slipping away from us. America can only remain competitive in high tech and clean tech by being self sufficient in the raw materials. It's up to you.

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